This article talks about cash credits which are mentioned under Section 68 of the Income Tax Act 1961.
Why Section 68 was introduced under Income Tax Act, 1961?
There was a great need and importance for introducing the provisions of section 68 under the income tax act, 1961 to safeguard and protect the interest of revenue, as assesse was engaged in harmful tax practices to evade tax in the form of fake cash credit entries in the books of account, after the introduction of this section many amendments have been taken place from time to time to enhance its applicability and to curb the menace and unearthing of Black Money, Accommodation Entries, Cash Credit Entries, etc. Assess used to hide its Income or suppress income by diverting its cash receipts and showing it as “Unsecured Loan” or in any other form in the books of accounts, thereby avoiding payment of tax on business receipts. It is a tax evasion device or tool used by a large number of assesses across the nation to evade tax and thereby result in tax revenue loss to the Government of India. To curb such malpractices and tax evasion tactics, section 68 came to light with timely amendments in it,
Extract of Section 68
Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :
Provided that where the assessee is a company (not being a company in which the public is substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about explains the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid is satisfactory
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB)of section 10.
Let us understand this section critically and easily;
1. Applicability of Section 68 of Income Tax Act, 1961
- Section 68 is only applicable and can only be invoked when assesse is maintaining books of account and there is any sum which is found credited in the books of an assesse maintained for any previous year and assesse does not explain about such cash credits or explanation offered by assesse was not satisfactory, then assess will be held guilty under this section and thereby as a result, provisions of this section will trigger. All credit entries appearing in the books of accounts of the assessee are covered under this section.
Reliance can be placed Smt. Shanta Devi Vs. CIT [ 1988] 171 ITR 532 ( Punjab & Haryana High Court ). In the abovementioned Case Law, it was held that on perusal of section 68 of the act shows that about the expression ‘Books’ the emphasis is on the word ‘ assessee meaning thereby that such books have to be the books of the assessee himself and not of any other assesse.
2. Onus to prove under Section 68 of Income Tax Act, 1961
- The burden lies on the assesse to prove that any sum which is found credited in books was a genuine transaction; nature and source of such entry should be proved by assesse, otherwise it would be treated as income of the assessee. But Assess was not required to prove “Source of Source”, which means assesse was not required to prove the source of income of the person from whom he has received the amount. The only thing which assesse was required to do is to prove the genuineness of the transactions as well as the creditworthiness of the person providing credit along with documentary evidence, it is not the business of the assesse to find out the source of money of the person providing a loan or any other credit in any form. Once the assessed furnishes sufficient documents and explanations, it is on the onus of the department to verify the same and act accordingly.
3. Tax on Unexplained Cash Credits
- Unexplained Cash Credits are chargeable to tax u/s 115BBE of the Income Tax Act, 1961 at the rate of 60% plus surcharge plus Cess that comes to overall 78% that too without deduction of any expenses. The real and main purpose of introducing this provision is to charge the tax at higher rates than the normal rates so that assesse would avoid concealing and hiding its income. The logic behind increasing the tax rate from 30% to 60% was to make sure assess who is hiding and concealing their income will not be treated at par with other taxpayers i.e. both disclosed and undisclosed income will be taxed at roughly 30%, to penalize the tax evaders, the tax rate was increased.